Revenue Participation Financing for Startups and Growing Small Businesses
Since I first discovered revenue-based (aka Revenue Royalty Certificates) back in the mid-1980s (yes, 1980s), it's surprising to hear people now talking about it as if it was something new. Here's just the latest piece thrown onto the pile.
"Royalty Financing": The New, New Thing in Venture Capital
Basically, the idea is this: Someone lends you money (in this case, $100,000), but instead of a fixed interest rate, you agree to pay the lender a percentage of your gross sales (not net profits) each month -- 2 percent to 6 percent is customary. The royalty payments may continue for a specified time period (generally three to five years) or until the lender has received all of their money back plus a 20 percent return on their investment (in this case, $120,000 in total payout). Once the time period expires or the desired return has been achieved, the loan is considered fully paid, and you stop making the royalty payments each month. (Source)
So where do you find royalty investors? A number of firms are setting up venture funds built entirely around the royalty financing concept. Among those are Arctaris Capital Partners, LP in Waltham, Mass. (www.arctaris.com); Cypress Growth Capital LLC in Dallas (www.cypressgrowthcapital.com); Revenue Loan LLC in Seattle (www.revenueloan.com); and Noventi Ventures in Menlo Park, Calif. (www.noventivc.com).
Before you get overly-excited understand that these firms only lend to companies with reliable existing revenues not startups. However, it is possible if you have a strong team to find individuals to back you using Revenue Royalty Certificates. In the case of startups, there is normally a moratorium of 6 to 12 months on payments to allow the company time to achieve traction. To find out how you can pitch an RRC to angel investors and set one up, click here: How Deal-makers Close Angel Investors.